Service tax on renting of immovable property for hotel accommodation excluded; tax demand set aside on appeal

Service tax demand challenged on amounts received for renting immovable property used to operate a luxury hotel. The analysis rests on the exclusionary clause that exempts renting of immovable property used for accommodation, including hotels; therefore Explanation 2 cannot be read to impose service tax where Explanation 1 excludes such accommodation use. Reliance was placed on prior tribunal reasoning that renting a building for a hotel falls within the exclusion. Consequence: the demand based on treating hotel letting as taxable service was set aside and the appeal allowed.

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Issues: (i) Whether amounts received by the appellant under lease agreements for operating a luxury hotel and convention centre fall within the taxable service "renting of immovable property" under Section 65(105)(zzzz) of the Finance Act, 1994 for the period June 2007 to March 2008, or are excluded from taxation by the exclusion for buildings used for accommodation (including hotels) in Explanation 1(d) to that provision.

Analysis: The dispute concerns the scope and construction of Section 65(105)(zzzz) (renting of immovable property) and its Explanations. Explanation 1 lists categories of immovable property and contains sub-clause (d) excluding buildings used for accommodation, including hotels. Explanation 2 contains a deeming provision treating property partly used for business as property for use in furtherance of business or commerce. The Commissioner (Appeals) relied on Explanation 2 to treat the leased hotel and convention centre as taxable. The Tribunal examined the exclusionary language of Explanation 1(d) and the statutory scheme, including related provisions such as Section 65(90a) and the amendments by Clause 76 of the Finance Act, 2010. On a true construction the exclusion in Explanation 1(d) removes buildings used for accommodation (including hotels) from the definition of "immovable property" for the renting service; that exclusion therefore brings leases for operating hotels outside the taxable ambit of Section 65(105)(zzzz). The Tribunal followed earlier decisions (including Jai Mahal Hotels and Ambience Construction) holding that leasing of buildings for use as hotels is excluded from the taxable renting-of-immovable-property service and concluded that the Commissioner (Appeals) erred in applying Explanation 2 to negate the exclusion in Explanation 1(d).

Conclusion: The lease receipts received by the appellant for operating the luxury hotel and convention centre are excluded from the taxable service "renting of immovable property" under Section 65(105)(zzzz) by Explanation 1(d); the impugned order confirming service tax demand is set aside and the appeal is allowed in favour of the appellant.

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